Ananda’s Armada in a storm
Bumi Armada’s high capex in the last three years and hiccups in some of its operations have put a strain on its balance sheet and the spotlight on its major shareholder
A combination of volatile oil prices and strained balance sheet have piled the pressure on Ananda Krishnan-controlled Bumi Armada. What transpired in the company which prided itself as among the formidable FPSO service providers in the world?
IF anybody thought the worst was over for Bumi Armada after it sailed through a brutal downturn in the oil and gas industry three year ago, they were proven wrong last week.
An internal memo from executive director and group chief executive officer Leon Harland painted a sombre picture of the oil and gas company that is controlled by low-profile billionaire T. Ananda Krishnan.
Harkland told employees that the company had not made much progress with regard to improving its financials. Cashflows are tight and it has limited its efforts to pursue new work.
He further stated that the financial situation has caused the group to be selective in pursuing new jobs and it hopes to complete its refinancing of a US$500mil facility by the first quarter of next year.
The message to employees supposedly triggered the stock to fall to an all-time low.
At 15.5 sen per share, Bumi Armada’s market capitalisation is only RM910mil. Its value was RM13.5bil in May 2014, just before oil price started its slippery slope down from its high of US$120 per barrel. Even at the nadir of oil price crisis when crude went below US$30 per barrel in early 2015, Bumi Armada fetched a valuation of almost RM5bil.
The value destruction is huge. Ananda’s 34.9% stake is now worth only RM318mil, compared with more than RM1.75bil three years. Investors such as the Employees Provident Fund, Permodalan Nasional Bhd and Kumpulan Wang Amanah Pencen are sitting on paper losses.
It is more painful for those who subscribed for Bumi Armada’s rights issue that was done at RM1.35 per share in October 2014. The company raised RM1.9bil which was used mainly to expand its business.
In 2015 and 2016, Bumi Armada’s capital expenditure was high, which stretched it finances.
Bumi Armada recent fall started with the company making another heavy provision in its third quarter results released two weeks ago. It made impairments to the tune of RM1.04bil, its second major provision in three years.
The provisions were for a floating, production, storage and offloading (FPSO) vessel called Armada Kraken that was finally deployed to an oil and gas field in North Sea. The other part of the provision came for its fleet of offshore support vessels.
A few days after the result was out, the internal memo was the talking point in the stock market.
Some view the memo as a warning shot to employees on the need for the company to take further measures to cut cost.
“I would not be surprised if the company embarks on a downsizing exercise. It has happened before and right sizing technically should bring about better results on the longer term,” says an executive in the oil and gas industry.
However, there is also another view – which is more damaging to the stock price – that the company would not have the financial muscle to bid for new jobs.
Although Harland had said the company would not make a cash call from shareholders, investors are not convinced.
Bumi Armada has net liabilities of RM9.6bil as of Sept 30. Interest servicing itself for the first nine months this year came up to RM390mil. It has an order book of RM22.3bil and looking at RM12.5bil more in potential projects.
In the immediate term, it has US$500mil loan that has to be refinanced by the first quarter next year. A successful refinancing should ease the repayment schedule of the company that has a gearing of two times.
Management has indicated to analysts that it was looking at several options to raise funds such as monetising some of its assets. A cash call is the last resort.
Some research houses such as AmResearch and KAF highlight the “rising risk” of a capital raising through equities, especially if the group secures new jobs.
However, a fund manager says that it is highly unlikely for Bumi Armada to undertake a rights issue at current levels.
“It would not raise much money and gives rise to a huge dilution. Why would shareholders, particularly Ananda agree to any fund raising through the issuance of shares?” says a fund manager.
Transition hit by stretched finances
The year 2017 is a transition for Bumi Armada, a company that started off by mainly providing offshore marine services to oil and gas companies.
The transition is a switch in the company’s earnings dependency from the low-margin and highly-competitive offshore marine services to the more lucrative but capital intensive floating production services.
The offshore marine services are largely broken into the supply of offshore support vessels (OSV), which work on short contract tenures and vessels that undertakes sub-sea works, particularly pipe-laying and trenching activities. Bumi Armada has 44 OSVs and three vessels for sub-sea activities.
Bumi Armada is among the top five compa- nies in the provision of floating production vessels for offshore oil and gas works. It has eight FPSOs and one vessel for storage and offloading of gas.
In 2013, before the collapse of oil prices and its strategy to grow its FPSO business, Bumi Armada was more dependent on the OSV market. It had more than 50 OSVs and only four FPSOs. Two out of the four FPSOs were operating in Nigeria where the cost of producing oil is high at about US$80 per barrel.
The two Nigerian FPSOs – Armada Perkasa and Armada Perdana – are no longer part of Bumi Armada’s operations following the collapse in oil prices.
Armada Perkasa was sold last year while operations on Armada Perdana is suspended because the charterer, Erin Energy Corp, which is an independent oil and gas compa- ny, could not pay on time. In the latest development, the Nigerian arm of Erin Energy has been placed under receiver/manager.
Apart from Nigeria, Bumi Armada also ran into problems with a FPSO – Armada Claire – in Australia in 2016. The client terminated the charter and the matter is now subject to arbitration. In the meantime, Armada Claire is moored in Batam, Indonesia.
The volatile oil prices, which caused a reduction in the demand for OSVs and Bumi Armada’s aggressive move into the FPSO business that required high capital expenditure in 2015 and 2016, caused a strain in its financials in the last two years.
The utilisation of the OSV vessels was about 35% in the second quarter and improved to 44% in the third quarter of this year. The charters on OSVs barely cover the cost of operations.
As for the FPSO business, the company delivered four vessels in 2017 and 2018 but saw its finances stretched.
Harland aptly sums up the company’s predicament in the 2017 annual report message to shareholders.
“It was challenging with substantially reduced activity in OSV, the termination of the Armada Claire FPSO charter, challenges with the Armada Perdana FPSO in Nigeria, plus ongoing construction of four FPO projects in the shipyards.
“As a result, we have been hit by reduced income whilst capital spending needed to continue at the same time and we have been relying on corporate debt facilities as result,” he had said.
On a brighter note, out of the eight FPSOs in Bumi Armada’s stable, six are mobilised and have started contributing to the company. Contribution from the FPSO business is more than the OSV business for the nine months this year.
Catalyst and concerns
Going forward, the catalyst for Bumi Armada is the outcome of its debt financing, monetisation of its assets such as the FPSO, the mobilisation of Armada Claire and its subsea vessels securing work in the Caspian Sea.
On debt financing, analyst are expecting the US$500mil unsecured loan to be refinanced considering the improved free cashflow of the company, particularly from its FPSO business where six out of the eight vessels are in operations.
The two FPSOs deployed this year are Armada Kraken that is operating in North Sea and Armada Olombendo that is deployed to Angola. For the first nine months of this year, net cash flow from operating activities improved to RM591.5mil compared with RM35.9mil last year.
“Of the US$500mil debt, the company has already repaid US$120mil and is negotiating with bankers to refinance the remainder. It should not be a problem as long as cash flows improves,” said a fund manager.
AffinHwang, which has a price target of 55 sen for Bumi Armada, highlighted the improved cash-flow of Bumi Armada in a research note.
As for Armada Claire, it has been reported that the FPSO is the frontrunner to secure a charter for an oil and gas field in Brazil that has been awarded to a company from Australia. The other bidders pulled out due to price concerns leaving Bumi Armada as the sole contender.
“Any news on the Armada Claire would only arrive towards the middle of next year provided oil prices remain at current levels,” says the fund manager.
Outside the FPSO business, Bumi Armada’s two vessels undertaking sub-sea activities in the Caspian Sea are expected to come under some scrutiny in the next two months.
According to UOB Kay Hian, the biggest risk to earnings at this juncture is the renewal of charter for Bumi Armada’s two vessels undertaking sub-sea works in Caspian Sea.
“We understand that both vessels are bidding for jobs in Russia, Kazakhstan and Turkmenistan with outcome to be known by end-2018. Assuming this, activity may be high in second and third quarters of next year. But it is not guaranteed that the vessels will earn revenues for all of 2019,” it said in a research report.
Most research houses have adopted a cautious stance on Bumi Armada even though it has a strong shareholder such as Ananda. None of Ananda’s companies have gone under and oil and gas still holds a special place in his heart.
Hence the speculation of Ananda taking Bumi Armada private persists.
However, people close to the tycoon says that he is paying close attention to the developments in Bumi Armada and looking at the company and its position in the volatile oil and gas industry.
“The shareholders are getting anxious. There may be some changes in the management if the company continues to spring negative surprises. Ananda is sharp and wants to see plans executed well.
“He is looking at Bumi Armada. But not with the view of taking it private as what the market speculates,” says an executive familiar with the workings of Ananda.